Ebook Operations management Part 2

(BQ) Part 2 book Operations management has contents: Product development and design, materials management, aggregate planning and master scheduling, material and capacity requirements planning (MRP and CRP), scheduling and controlling production activities.

6.1 INTRODUCTION

Product design is the mother of all operations processes in an organisation The processes formanufacture, the planning of production, the processes and checks for quality depend upon thenature of the product One may say that it all starts with the design of the product Even the logistics

or plain shipment of the product depends upon how or what the product has been designed for.Design gives the blueprint When the design engineer keys in the computer aided design or when aproduct design artist draws lines on a sheet of paper, it starts a train of activities

6.2 PURPOSE OF A PRODUCT DESIGN

Is product design a creative designer’s fancy? In popular perception, the term designer conjures upimages of a maverick yet highly creative artist who in his fits of imagination comes up with a hithertonot seen product What is design without creativity in it? Indeed, designs are ‘creative’ in nature andthey should be so However, in an organisational context, the design should serve the organisationalobjectives while being creative Since an organisation has a purpose, the product design should help

to serve that larger purpose

Design starts with conceptualisation which has to have a basis Providing value to the customer,the return on investment to the company and the competitiveness of the company should form thebasis of the product design effort What separates a product designer from a freelance artist is theformer’s orientation towards these organisational objectives

A product’s design has tremendours impact on what materials and components would be used,which suppliers will be included, what machines or what type of processes will be used to manufacture

it, where it will be stored, how it will be transported Since a customer does not necessarily imply analready tied-up customer, but also a potential one, what and how will the general yet target customercommunity be informed depends upon what the design of the product is For instance, a simple

PRODUCT DEVELOPMENT AND DESIGN

6.5 Design for Manufacture (DFM)

6.6 Design for Excellence

• Exercise

• References

product like toothpaste which is also designed to act as a mouth freshner needs to be placed,advertised, promoted and priced differently Thus, marketing is also impacted by product design Aproduct design reflects a company’s overall strategy.

Product development and design is primarily governed by management decisions with respect

to quality and pricing policy A development programme and a market survey can provide information

as to market potentialities as well as functional, operational, dependability, and durability requirementsand possibilities Selection of the functional scope and application of standardization, simplification,and specialization principles are closely related to plant efficiency and to its net profit and musttherefore be an integral part of management policy The economics of a proposed new product ornew model have to be analyzed in order to establish the market size that would justify production.Aesthetic considerations come normally at an advanced stage, but may sometimes be a dominantfactor in design, especially with consumer goods Finally, product development and design must becarried out with close liaison with the production departments, in order to ensure that the rightmaterials and processes are utilized and that their implications are considered at a fairly early stage

Many factors have to be analyzed in connection with development and design, factors varying incharacter and complexity, factors affiliated with different fields in production and industrial engineering.Some of these may be grouped as follows:

1 Marketing aspect

2 Product characteristics

(i) Functional aspect,

(ii) Operational aspect,

(iii) Durability and dependability aspects, and

(iv) Aesthetic aspect.

3 Economic analysis

(i) The profit consideration,

(ii) The effect of stardardization, simplification, and specialization, and

(iii) The break-even analysis.

Fig 6.1 Some interrelations involved in product design

6.3.1 Marketing Aspect

First, it is necessary to establish that the proposed product will satisfy a demand in the market, thatwhat it is supposed to do and the services it can offer are both desirable and acceptable If noconsumption is envisaged, there is no point in proceeding with product design

The demand for the product in the market may already exist, and its volume can then be assessed

by consumer research and sales figures for identical or similar commodities Demand can also becreated with the introduction of a new product, either by filling in a gap in the market or by offeringnew properties, such as novelty, appearance, or some other specific merits

The volume of such a demand is more difficult to forecast Market research is a useful tool inthese cases, but experience and sound judgment are required to evaluate and apply the results ofsuch research, and in some cases a certain amount of speculation is inevitable We shall discusssome problems connected with market research in the next chapter

The volume of demand is a function of a multitude of factors, some of which are closely related

to local conditions and are sometimes difficult to define or measure It is therefore essential for anenterprise to keep in touch with the market and “feel” its trends, especially when this market isremote and different in character from the local one This is of particular importance to firmsdepending on export markets for the distribution of their products

If we analyze, for example, the case of an American manufacturer of automobiles, we shall findthat the percentage of output destined for export is rather small, and design policy would therefore

be mainly dictated by American tastes and preferences A British manufacturer, however, who sells

a substantial proportion of automobiles outside Great Britain, has to watch carefully the trends inexport markets in order to try and amalgamate the requirements and tastes of the various foreignand home markets in an acceptable design

Another pertinent question related to product design is : Should the customer get what he wants

or should he be offered what he is supposed to want? Basically this is an economic question Ifmanagement wants to achieve maximum satisfaction and sets itself as a target to supply the customerwith what he wants, it may be faced with the possibility of having to produce an infinite variety ofmodels to suit every taste On the other hand, were management to ignore the customer’s wishes or

to maintain that he does not really know what he wants and should therefore be told what is good forhim, the designer’s task would become far simpler, but the sales department would have to face anunpredictable market

In practice, product design is a result of some sort of compromise between infinite variety onone hand and the designer’s concept of the ideal design on the other In order to try selling thiscompromise to potential customers, management resorts to an advertising campaign the policy ofwhich is dependent on the characteristics of the “compromised design” and on how far it conforms

to, or differs from, the expressed desires of the market to which such a campaign is directed.Generally, the main objective of advertising is to expand the market, this being achieved by:Providing general information about the existence of the product

Providing technical information about its functional characteristics or utilitarian purposes.Drawing the customer’s attention to those attributes of the product which he wants

Winning undecided customers by exhibiting possible attractions (such as colour, design, novelty,and price) that may persuade him to prefer the product to one offered by competitors.Creating demand among a passive population of customers

Educating the customer, or telling him what he should want

Apart from these direct techniques, management may have some additional aims, such asincreasing the prestige of the firm as a whole, banking on the popularity of one product to strengthen

or introduce another or to publicize one aspect of the firm’s activity for the purpose of raising money

or deviating attention from other activities, and so on Once the design features of a product havebeen ascertained, appropriate advertising methods can be selected

6.3.2 The Product Characteristics

FUNCTIONAL ASPECT

When the marketing possibilities have been explored, the functional scope of the product has to becarefully analyzed and properly defined The definition of the objective itself rarely tells us verymuch about the functional scope envisaged A washing machine, for example, has a clearly definedobjective: to wash clothing This does not state, however, how the washing should be carried out,whether the machine should be capable of heating the water prior to washing, whether rinsing ordrying, or both, are to be done by the machine, and if so by what method, and what should theproportion be between automatic functioning and manual supervision A functional analysis of thiskind obviously affects the design of the machine, its complexity, its appearance, and its price.Sometimes functional aspects are detachable, and usage can be left to the customer’s decision

A steam iron is a case in point The additional function of dampening the cloth when required, prior

to or during ironing, is incorporated in the steam iron, the main duty of which is to iron the cloth Thecustomer can decide whether and when to exploit this characteristic of the apparatus

There is a trend to offer functional versatility of the product, thereby increasing the range ofapplications and sometimes combining several tools in one A food mixer, for example, allows for alarge number of attachments to be added for a variety of duties Basically the mixer housing contains

a power unit and a speed regulator, but it has to be designed so as to serve all the attachments, andthe customer has to decide and define for himself the functional scope to be compatible with hisneeds, his taste, and his pocket Household power-tool sets are designed on very much the sameprinciple: The hand drill is the basic unit, and with attachments it can become a table drill, a lathe, apolisher, a hedge cutter, etc Versatility of production machinery may quite often result in substantialsavings in floor space and capital expenditure, and this may become one of the fundamental factorsaffecting design policy Another example of versatility in design is shown in Figure 6.2

Fig 6.2 Desk combinations (simplification of design) Variety achieved through standardization: With a

limited number of components (one piece table to without joined corners or seams, legs made of seamless steel tubes, and interchangeable drawers) the designer managed to offer 36 possible combinations while exhibiting a pleasant style and functional simplicity

(Courtesy: N.V Wed J Ahrend & Zoon—N.V “Oda” Stallwerk–Amsterdam, Holland Designer: Friso Kramer,

1958).

The ‘get ready’ stage before the operation proper and the ‘put away’ time (including cleaning)should be carefully analyzed with respect to the excepted skill of the operator Too often one findsingenious gadgets (for example, in the field of household equipment) that are capable of performing

an operation in a fraction of the time normally required but which involve such complicatedpreparations or such lengthy cleaning and ‘put away’ subsequent operations, that the ratio of netmachine time to overall machine time becomes absurdly small The beneficial features attributed tothe gadget in such cases are rather questionable

Versatility of equipment should also be analyzed in this light Especially when subsequent operationsare to be carried out with the aid of different attachments, the designer should always bear in mindthe time required for an operator to perform the change over and should make certain that this time

is in reasonable proportion to the operation time

DURABILITY AND DEPENDABILITY

These are two factors closely related to the selection of materials and class of workmanship andhence to the design of the product and the economical analysis of its cost Quality is not always asimple characteristic to define, but durability and dependability are two factors that often determinequality and have to be carefully considered by the designer Durability is defined mainly by thelength of the active life, or endurance, of the product under given working conditions, but a measure

of the product capability to idle or withstand storage is also often considered in assessing durability.Durability need not always be associated with selection of good materials The actual working life

of a match or a rocket motor may be rather limited, but that does not mean that materials for thesearticles may be of low quality An additional criterion, therefore, has to be considered, that of

dependability, or the capability of the product to function when called upon to do its job Returning toour matches, dependability may be related to the number of duds in a box, and while the manufacturer

is eager to reduce this number to a minimum, he need not choose the very best raw materials toensure that not even one match will fail Dependability of rocket motors, however, may be morerigidly defined, and first class materials are chosen in spite of the short active life that is envisagedfor them in some applications

Another aspect of durability is that of maintenance and repair The amount of repair andpreventative maintenance required for some products is closely related to quality and design policy.This is of particular importance when the equipment is supposed to operate continuously and whenany repair involves a loss of running time

Problems of convenience and accessibility in operating the equipment have already been discussed,and the same remarks are valid for maintenance and repair Easy accessibility is a fundamentalprinciple in a sound design, and thorough knowledge on the part of the operational durability,dependability, and maintenance requirements of the product are absolutely essential to ensure awell- balanced design within the policy outlined by higher management

AESTHETIC ASPECT

In what way does the appearance of a product affect its design? In most cases, where the functionalscope, durability, and dependability have already been defined, the aesthetics are mainly concernedwith molding the final shape around the basic skeleton This molding of shape may very often beseverely limited in scope, and what finally emerges is sometimes termed a ‘functional shape’ Theview that functional shape is necessarily divorced from aesthetics, especially where engineeringstructures or equipment are concerned, is well-exemplified by bridges, locomotives, or machines ofthe late nineteenth or early twentieth century (see, for example, Fig 6.1 However, a study of thegradual changes in shape of these objects in the past few decades would convince us that there hasbeen an increasing recognition of the role of aesthetics in design This is perhaps partly due to man’saesthetic taste being reconciled to accepting these objects as an integral part of the landscape oreveryday life, thereby leading to a modification of the original attitude that these “Monstrosities” arehopelessly ugly and should be left alone

Functional shape is a concept in its own right among designers Those who believe in functionalshape argue that compatibility of function with shape is logical and should therefore be accentuatedand exploited, rather than covered up A standard lamp is first and foremost a lamp and not a flyingsaucer, and there is nothing wrong with its looking like a lamp This approach is referred to inFig 6.2, where the aesthetic aspects are dealt with at the design stage, after all the other aspects ofthe proposed product have been analyzed

In some cases, however, molding of shape may have financial implications; for instance, whenspecial materials have to be used or added to those basically required from the functional point ofview or when additional processes are involved Such cases will call for a careful cost analysis ofthe aesthetic aspects

In extreme cases, aesthetics are the governing factor in design and completely dominate it This

is especially true for many consumer goods, such as automobiles and household equipment, orfashion goods The functional scope, though more or less defined and accepted, may also be widened

to accentuate the novelty of the new model But the idea of the new design starts with the concept

of its shape, from which the idea evolves and grows The technical considerations have to besomehow fitted in at a later stage, this being in complete contrast to the conventional sequenceshown in Fig 6.1

When styling is a dominant factor in product design, it is often used as a means to createdemand Changes in fashion and taste, evolution of form, and the introduction of new ideas quicklyoutdate previous designs If the market is psychologically receptive and eager to discard formerdesigns in favour of new ones, styling becomes a race against time, a race that determines thesalability of the product

Many tools can be utilized by the designer to bring out aesthetic characteristics Some of these are:

1 Use of the special materials, either for the parts of the housing or as additional decorations.Notable is the use of chromium strips, plastics, wood, glass, and fabrics for the purpose

2 Use of colour, either natural colour of the material concerned or by use of paints, plating,spraying, or even lighting Composition and contrast of colours is of great importance to theindustrial designer in facilitating convenient operation and attractive appearance

3 Texture supplements colour, either by appropriate treatment of the given surfaces or coatings.Surface finish and requirements of brightness as determined by styling may in turn affectthe production processes in the finishing stages

4 Shape denoted by outer contours and similarity to familiar objects Shape can be exploited

to accentuate particular features, to create a sense of spaciousness or illusions of size,richness and dependability

5 Line is used to break the form, also for the purpose of emphasizing parts of it, or to give asense of continuity, graciousness, and stability

6 Scaling the product, either to a blown-up size or to a small size (modeling) This createsnovelty and a sense of completeness The success of styling of some popular smallautomobiles in Europe may be partly due to the designer’s talent in creating a feeling of stillhaving the full-size version, with all its features

7 Packaging, especially for small items Novelty and attractiveness of packaging is oftentransferred in the mind of the customer, attributing perhaps non-existent values to the contents

In extreme cases packaging may assume an appreciable portion of the total productioncosts and become the center of the design project

Aesthetic molding, especially when governed by the selection of material, colour, texture, andsometimes even line, has great economic advantages, since great variety can be achieved at acomparatively low cost The basic product remains the same, and variety is obtained by finishingprocesses alone Henry Ford’s maxim that the customer may choose any colour he likes, provided it

is black, is no longer valid Modern production control techniques allow for a vast number ofcombinations of colours and textures to be offered with little difficulty

Aesthetics have been fully recognized as an integral part of design, and no designer worth hismettle can afford to ignore their implications, their tools, and their benefits

6.3.3 Economic Analysis

As shown in Figure 6.1, an economic analysis is the key to management decision in product designpolicy Having obtained sufficient information about customers’ requirements and market potentialities

on the one hand and a detailed study about the functional, operational, and quality aspects of theproposed product on the other, the economic analysis can proceed by seeking an answer to thefollowing questions:

What capital expenditure is required for manufacturing the new product?

What total production costs per piece are envisaged?

What is the reasonable margin of profit that can be expected?

Do the price (= total costs + profit) and the features of the product render it competitive

in the market?

In what numbers is the product expected to be sold?

Here, again, the interdependence of variables should be strongly emphasized Not one singlequestion in this list can be isolated and solved independently of the others The economic analysis is

in fact a cyclic and repetitive procedure Each question is weighted in the light of the answer and thedata provided by the previous question, and all the answers are checked when their turn comesagain to be re-evaluated in the following cycles, until a state of equilibrium is reached and no furthermodifications to these answers are required

PROFIT AND COMPETITIVENESS

The measure of competitiveness of the product corresponds to the portion of the market it succeeds

in capturing This is largely dependent on the value the customer is prepared to put on the product,and on the ratio of this value to the price As customer assessment of value is not universallyuniform but subject to preference of features, performance, or taste, ratios of values to prices varywith customers A state of equilibrium is formed in which the market is divided between differentpreferences This equilibrium may change: If the ratio of value to price of the product becomesmore favourable, when compared with other products, the product increases its portion of the marketand becomes more competitive

Such an equilibrium is shown in Fig 6.3 where the total costs include set-up, materials, overheads,storage, and distribution The total profit is determined by the margin of profit per unit and by the salesvolume If the organization seeks to increase its profit, it can try one of the following methods 6.3:

(a) Increase the margin of profit per unit, hence the sales price, but leave the total production

to costs unchanged If such a course would not affect the sales volume, the total profit would beproportional to the increase in the margin of profit per unit Such an increase, however, can upset themarket equilibrium unfavourably, in that both the ratio of customers’ value of the product to its pricewill deteriorate and the products of competitors will become more attractive The market mayshrink, and the total profit, far from attaining the expected value, may in extreme cases fall below itsoriginal level

(b) Leave the total costs unchanged, but try to improve the ratio of value to price and thus

widen the market This can be done (1) by producing a better or more attractive product at the samecost, (2) by launching an intense advertising campaign in order to boost the customer’s assessment

of the product value, or (3) by reducing the sales price at the expense of the margin of profit per unit,

in the hope that the market will expand enough to increase total profit Too marginal a profit per unit

is, however, undesirable, as it allows little protection from possible fluctuations in the market, andeven slight instabilities may turn a small profit into a sizeable loss

Fig 6.3 Methods for increasing total profit

(c) Reduce the total production costs and pass some of the benefit to customers in the form of

reduced sales prices If both the profit per piece and the size of the market increase, a substantialimprovement in total profits will be achieved This course calls for a continuous search after bettermethods, better processes, better materials and their utilization, and better management to reduceoverheads There are, however, some limitations to the rate of improvement one can attain, such as

basic labour and material costs and limited resources or credit hampering expenditure on newequipment and machines Minimum requirements of quality should also be studied and met, as areduction in price at the expense of quality is easy enough; customer’s assessment of the productvalue, however, deteriorates accordingly But reducing production costs and thereby expanding themarket, while sustaining accepted quality standards, offers a challenge to the production engineer.Probably the most characteristic feature of this process is that it is both dynamic and continuous,that each success is a further advance along the spiral of increasing productivity and standard ofliving (see Figure 6.4).

Fig.6.4 Spiral of increasing productivity and standard of living

(Courtesy: The British Productivity Council, Report on Metulworking Machine Tools, 1953).

THE THREE S’S

The three S’s refer to standardization, simplification and specialization—three related subjects thatare at the root of any economic analysis of product design The three S’s can be defined as follows:

Standardization is the process of defining and applying the “conditions” necessary to ensure

that a given range of requirements can normally be met with a minimum of variety and in a reproducibleand economic manner on the basis of the best current technique

Simplification is the process of reducing the number of types of products within a definite range Specialization is the process whereby particular firms concentrate on the manufacture of a

limited number of products or types of products

The three processes are usually linked together and develop as a logical sequence From a widerange of requirements it is first necessary to sort out the essential features, define them, and thenwork out in a scientific manner, the minimum variety required to meet these essentials This is aprocess of standardization, and it is mainly an engineering process Within a given range, whethercovered by standards or not, a process of simplification can be carried out with the view of reducingthe variety of products or materials that are produced or purchased This is both an economic and anengineering process, and specialization is one of its natural outcomes.

Methods of testing characteristics or performance

Methods of installation to comply with minimum precautionary measures and convenience ofuse

The first three categories relate to limitation of the number of sizes or grades and some aspects

of quality, one of the important aims being interchangeability of components or assemblies Adherence

to standards of raw materials is one of the fundamentals of product design, since any deviation fromthe standards in this respect may cause a substantial increase in the cost of materials Industry isrich with examples in which designers specify “special” materials wheareas the standard gradescan do just as well

Standardization and interchangeability impose certain limitations on the designer and demandhigher skill and effort in planning It is easy enough when designing a new component to decide that

no standard really meets the special requirements of the case in hand and that a special part has to

be specified What designers seem to forget is that one of the purposes of standards is to providesolutions to relieve them of the task of having to solve afresh some basic problems, and therebyallow them more time to concentrate on the broader aspects of the design

Another prerequisite of interchangeability is the precision required of the manufacturing process

in order to obtain production within the specified tolerances This implies that production control has

to be tightened so that any deviations from the given standards will be immediately noticed andappropriate action can be taken to avoid the process getting out of control

Standardization has, however, many advantages, some of which may be briefly listed below:Reduction of material waste and obsolescence

Concentration of effort in manufacturing; hence, simplification and specialization

Reduction in inventories, both of materials, semifinished, and finished products

Reduction in bookkeeping and other paper work

Lowering the grades of skill required in manufacture and assembly

Reduction in price; hence expansion of the market

Reduction of repair and maintenance costs

Simplification is a constant source of disagreement between the sales department and the productionpersonnel A production engineer prefers little variety, minimum set ups, and long runs (Figure 6.5).Simplification enables the production department to improve planning, achieve higher

Fig 6.5 Effect of variety on scheduling

rates of production and machine utilization, and simplify control procedures The salesman, on theother hand, strives to satisfy the customer by giving him a choice or by offering him the nearest towhat he wants The pro’s and con’s simplification are given in the accompanying listing

Pro simplification Pro variety

Reduce inventories of materials and finished products Satisfy a wide range of demand

market to study its tastes andrequirements

salable products because thecustomer directs all his orders toother vendors

Simplify inspection and control

Reduce required technical personnel

Reduce sales price (through production simplification

and reduction of distribution costs); hence expand

the market and the plant

Shorten or eliminate order queues

The last point in favour of variety deserves, perhaps, some further clarification Some salespeople claim that variety encourages consumption and that, especially where consumer goods areconcerned, the psychological effect of plenty creates demand Furthermore, market research bysome firms seems to suggest that in some cases similar products tend to capture roughly the sameportion of a given market The prospects of increasing total demand on the one hand and the firm’sportion of the market on the other, may have been the main causes for boosting variety to the extent

found nowadays in industry From the customer’s point of view this is a very unsatisfactory state ofaffairs A flood of variety confuses the customer, who ceases in many cases to appreciate the finedifferences between similar products and has either to make a haphazard choice or to invest effort,time, and study (and quite often money) to enable him to make an intelligent choice.

This is undesirable for the firm as well Apart from missing all the advantages listed above whensimplification is applied, an analysis of the market sometimes shows that variety has long passed thesaturation point and that an increase in variety will not be even noticed in the market Also, the division

of the market between too large a number of products makes each portion so small that prices have to

be kept at high levels to avoid losses

Fig 6.6 Analysis of sales by products

When a great variety exists, a sales analysis can be made to establish the salability of theproducts When the accumulative sales income is plotted against the number of products offered forsale, it is very often revealed that a comparatively small number of products contributes very little inthis respect (Figure 6.5) This is sometimes referred to in industry as the “25% to 75%” relationshipbecause in many cases it was found that 25 per cent of the products brought in 75 per cent of theincome, although in some extreme cases studies revealed as small as 10 to 90 per cent relationships.This leads to unnecessary drain of the firm’s efforts, which should be directed to promoting themore profitable products A more desirable situation is when responsibility for income is more evenly

distributed between products (i.e., when the curve is “flat” as is the lower one in (Figure 6.6), which

is achieved through reduction of variety

The effect of quantity on the profit contribution of the product is illustrated in Figure 6.6, where

the sales income is represented by the straight line bQ, in which Q is the quantity sold and b is the

income per unit The costs to the firm consist of:

Fixed costs F, which are independent of the quantity produced and include executive

salaries, depreciation of plant and equipment, etc

Variable costs aQ, where a respresents the constant total costs per unit, including materials,

labour, and other direct costs that vary with the plant activity The variable costs are

shown in Figure 6.7 by the straight line aQ.

Fig 6.7 A break-even chart

The division into fixed and variable costs represents only an approximate interpretation of the

total costs function and may not be valid for a very wide range of Q.

The total costs are given by the summation of fixed and variable costs (F + aQ), and the point

of intersection of this line with that of sales income is the break-even point (BEP) corresponding to

a sales volume Q1 gives profit At the point of intersection,

where Z is the profit of the plant The desirable level of the plant activity can be expressed in terms

of the safety margin or the profit as

Fig 6.8 An annual break-even chart

The break-even chart may be either on a monthly (Figure 6.8) or yearly (Figure 6.8) basis Alow BEP is hightly desirable because it increases the safety margin of the product From Eqn.(6.1)

it is obvious that the BEP can be lowered by three methods (see also Figure 6.9) as follows:

Reduce the fixed costs from F to F′, thus lowering the BEP to

Fig 6.9 Methods for lowering the break-even point

A similar diagram to the break-even chart, called the profit-volume chart is shown in Figure

6.10, where the fixed costs are marked as a negative quantity on the ordinate The BEP is given bythe intersection of the income line with the abscissa Operation below the abscissa incurs a loss;operations above it, a profit

Fig 6.10 An annual profit-volume chart

The profitability of the product is indicated by the slope of the income line, called the P/V

(Profit-Volume) ratio and denoted by ϕ:

1

Fixed costs (Profit) + (Fixed costs)

When the launching of a new design or model is contemplated, a careful analysis of the economics

of the proposed project has to be undertaken The purpose of introducing a new model to the marketmay be two fold:

1 To increase the profit of the organization

2 To avoid decline in sales of an existing model due to serve competition Such a situation callsfor incorporating novelty and new features in the company’s products; even when no immediateincrease in the profit is envisaged, it is aimed to achieve such an increase on a long-term basis

The profit of an existing product is computed, using Eqn 6.5, as

Tooling, jigs, and fixtures; resetting of machines, etc

Purchase of special machines or equipment

Changes in layout

These preparation and “changeover” costs (symbolized as s) will have to be returned by the

new design, so that the new profit should be

Z2 = j2Q2 – F – s (6.6)

It has been assumed here that the fixed costs are mainly dependent on the existing machinery ofthe organization and are therefore not likely to change very much It is desirable that the new profitwill be larger than, or at least equal to, the existing one or

Q

ϕϕ

P/V ratio of new design (6.8)

It is clear that unless the P/V ratio of the product can be greatly improved, the organization will

have to sell more in order to justify the capital investment required for the introduction of the new

design If, for example, the P/V ratio of the new design remains at the same level as that of the old

This fact is illustrated in the profit-volume chart shown in Figure 6.11 Line circle represents the

existing product, yielding profit Z when Q units are sold

Fig 6.11 Effect of P/V ratio on the required market size of a new design

For a new design, the preparation costs are added to the fixed costs F If the P/V ratio is 2 unchanged (line 2), it is necessary to sell Q2 units to obtain the same profit From the similarity oftriangles it is easy to see that in this case

2 1

Q

1 1

+ ++ + 1

which is what we obtain from Eqn 6.7 when D = 1 If an increase in the market is not envisaged, the P/V ratio must be increased (line 3) It is possible to achieve the original profit at Q3 < Q1 if the P/V ratio is steep enough (line 3) However, even when the number of pieces sold is to remain unchanged (Q4 = Q1), it is necessary to have a higher P/V ratio than the existing one (line 4), while

a decrease in the P/V ratio will increase appreciably the required sales volume (line 5).

Example

The annual fixed costs of a product are known to be $200,000 and the annual net profit $40,000 theaverage monthly sale being 820 units A new design is contemplated, involving an expenditure forpreparations amounting to $ 80,000, to be returned in two years It is expected that with new

production methods the P/V ratio may be increased by 5 per cent What should the annual sales

figure for the new design be

(i) so that the same net profit will be realized;

(ii) so that in addition to this profit a yield of 10 per cent on the capital invested will be obtained?

SOLUTION

(i) The ratio D = 1.00/1.05 = 0.95 The additional expenditure per year s = 80,000/2 = $40,000.

2 1

(ii) In the first year 10 per cent of the investment (i.e., $8,000) has to be added to the profit, or

Z2 = $48,000 The following expression for Q2/Q1 can be obtained by use of Eqns.6.5a and 6.6.

2 1

Q

Q =

2 1

volume will remain constant, i.e., Q1 = Q2 As already mentioned, this will require an improvement in

the P/V ratio, which can be quantitatively determined by

6.3.4 Production Aspect

Last but not least in the list of factors influencing design is the production aspect The product neednot only be well-planned on the drawing board, but its design must also be capable of being eventuallytranslated into palpable fact The designer must therefore face a multitude of practical productionproblems “Design for production” has become a motto among designers The following three aspects

of production engineering have to be weighed:

1 Selection of processes that will be the most suitable and economical for the purpose Such aselection will have to consider:

(i) The production quantities involved Some processes are very expensive to operate unlessused for a suitable production run

(ii) Utilization of existing equipment Such considerations may override acquisition of equipmentfor an ideally more suitable process

(iii) Selection of jigs and fixtures and other production aids, the use of which may affect thedesign of components

(iv) Sequence of operations and methods for subassembling and assembling

(v) Limitation of skill The selection of a process must be compatible with available skill andsometimes may be solely governed by it Mechanized and push button equipment isparticularly suitable to non-skilled or semiskilled operators, but it is usually expensive toinstall and must be justified by long runs

(vi) Application of new production processes The designer has to consider not only conventionaltechniques but also the latest developments and research into newer production methods

2 Utilization of materials and components with the view of

(i) Selection of materials having appropriate specifications

(ii) Selection of method or design to reduce waste and scrap

(iii) Using standard components and assemblies

(iv) Having interchangeability of components and assemblies with in the product

3 Selection of appropriate workmanship and tolerances that satisfy quality requirements, butwhich are at the same time compatible with the precision and quality that can be attained throughthe available processes Specification of quality may also affect the selection of processes

6.4 A FRAMEWORK FOR PROCESS DESIGN

Process design can be viewed as an interative exercise That is, problems are solved one at a timeand sequentially; then after each stage, or perhaps after several stages, the previous stages arereexamined to see if later steps have affected the best way in which these steps should have beendesigned This procedure is illustrated in Fig 6.13

6.4.1 Product Planning

Product planning serves as an input to process design However, in most cases the responsibility forthis phase rests with groups, such as marketing and engineering, which are generally found outsidethe domain of process design It is early in this stage that the perceived needs of the consumer are

identified If the process is service-oriented, thesee needs will be reflected in the proposed quality,speed, cost, and reliability of the service If, on the other hand, the process will be manufacturing-oriented, then these needs will be reflected in the product’s proposed quality, cost, function, reliabilityand appearance When these service or product parameters are transformed into a product, design,

it is essential that a cross-functional alliance between product, planning and process design groups

be established in order to ensure that the product objectives can indeed be profitably met Otherwiseonly local goals may be pursued For example, the marketing and engineering departments workingalone may design a product which is very costly to manufacture and very difficult to service Inshort, the transformation process should be considered well before the design is finalized This canusually be accomplished in the following way:

Information from the product development stage can be directed to those responsible for process R&D They in turn can determine if the process capability for this product now exists

within the firm, whether it exists outside the firm or whether research and development effort would

be necessary to meet the specified objectives Rough cost estimates would also be made for eachalternative identified In large firms a special process R&D department may be organized just forthis purpose In smaller firms this function is less formalized and more reliance would be placed onoutside suppliers of processing equipment and company engineers

Fig 6.13 The process planning task (From Howard L Timma and Michael F Pohlen, The Production

Function in Business, Richard D Irwin, Inc., Homewood, (II., 1970, p 302.)

As the process R&D phase progresses, information is feedback to the product development

group If the R&D group will be able to comply with the product specifications, then the product final design stage can begin If there are problems, however, in complying with product specifications,

then modifications in the product development stage must occur

Information from both product final design and process R&D are inputs to the process design stage The purpose of this stage is to generate alternative ways of meeting the objectives formalized

in the final design stage, determine the criteria by which they will be evaluated, and make the finalselection

6.4.2 Process Design : MACRO

Process design : macro is composed of two aspects: the choice of work station and the choice ofwork flow Work station selection involves the choice of machines to be included in the process,whereas work flow analysis concerns the flow of work between these stations

It is here that the decision is made as to whether the process will be continuous, intermittent, or

some combination of both In continuous processing, the process is in constant operation and

usually involves a high capital-to-labour ratio Typical of a continuous-process orientation are theautomobile industry, chemical processing, plastics, some high-volume electronic manufacturers, andsome utilities such as telephone, power and gas transmission Also characteristic of continuous-

process industries is a product layout where all the work stations are devoted exclusively to a

single product and are grouped according to the processing requirements of that product In morecases than not, the machines found at these work stations are special-purpose and costly and havelittle versatility outside their own product line Work flow is largely specified by the physicalcharacteristics that the product layout takes Often a conveyor system is used An example of thiskind of process is an assembly line for machining engine blocks at an automotive plant

At the other end of the spectrum we find intermittent processing Here production or service

for any one job is carried on intermently, not continuously There is a high mix of products which usethe facility, and portions of the process may be in operation several times during the day or onlyoccasionally during the month Usually the relatively low demand for each product or service doesnot warrant the high investment in a continuous process Typical of intermittent processes are jobshops, emergency rooms in hospitals, hospital laboratories, most office work, many educationalprocesses, and most services The predominant plant layout that one expects in intermittent processing

is a process layout In a process layout, machines or services of the same category are grouped

together We therefore find lathes, milling machines, inspection stations, and so on, in one location

A characteristic of the process layout is that the particular sequence of operations that one jobfollows is seldom repeated by other jobs flowing through the process For example, the sequencefrom admittance to discharge in a hospital is seldom the same from one patient to the next A patientmay or may not have X-rays, may or may not have surgery, may or may not undergo physicaltherapy, etc Consequently the work flow is not nearly as predictable as in the continuous-processcase, and we therefore find variable-path equipment, such as forklift trucks, employed in processes

of this type

The criteria used to make the choice between these two layouts include investment costs,material handling costs, direct labour costs, space requirements, equipment flexibility in meetingchanges in output quantity, system reliability and maintenance costs These economic and non-economic factors must, in turn, be weighed before making the final decision

6.4.3 Process Design : MICRO

In the next stage attention shifts to the details that make up the work at each station Concern is with

the operational content and operational method of The task Operational content focuses on the appropriate combination of steps that should be assigned to a work station Operational method, on

the other hand, is concerned with the efficient execution of these steps

PLANT-PLANNING SYSTEM

If a new plant will be built, then process planning proceeds in a relatively constraint-free setting If,however, the process must be installed in existing plant, then a set of special constraints must be

observed Therefore, the process planning system must interact with the plant-planning system

to ensure feasible layouts

PROCESS DESIGN AS AN ONGOING ACTIVITY

Process design is not strictly limited to new design Whenever the costs of inputs change by asubstantial amount, or whenever output levels or quality objectives change, process review should

be initiated If the reason for the reexamination is a price change in an input factor, then a new inputmix reflecting the different price ratio of the substitute inputs may be desirable For example, ifwage rates increase substantially as a result of a new labour contract, it might be possible thatautomated sequences in the production line which were inefficient uses of capital before might now

be profitable

Process design, then, should be a continuous activity—not one which is precipitated only whennew products or services are introduced Since it is continuous, the question of how much money tospend in its pursuit is of utmost importance The amount which should be spend depends, of course,

upon the benefits accured At the limit, effort should continue as long as the marginal benefits from the improvement are greater than the marginal costs Again we use the word marginal, since it is

only those costs that change which are relevant Fixed costs and some semivariable costs, to theextent that they are not affected by the redesign, are irrelevant

For firms at the continuous-process end of the spectrum, considerable effort can be channeled

in this direction Small improvements made in the process are magnified when the volume goingthrough each stage is large Cost savings in the automotive industry, for example, are measured infractions of a cent per unit In the service industries, on the other hand, savings are usually measured

in dollars, but the volume through each station is, of course, much less

If redesign requires investment, it seems reasonable to subject the investment to the review ofthe capital-budgeting process Therefore, this investment, along with all the other which the firm isconsidering, must face the final selection process in which only the most profitable survive

6.5 DESIGN FOR MANUFACTURE (DFM)

Competing on time has much to do with the manufacturing/operations flow times It is obvious that

a proper planning of the production processes, their workload distribution, the scheduling decisionsplanning of the required materials and men, and removing bottlenecks would result in improvedthroughputs However, what is not obvious is the fact that a good product design can help substantiallytowards the reduction in the manufacturing flow time

A good product design would be such that it makes many or all of the manufacturing relatedfunctions to be done in less time, less effort, and with less cost Such a product design wouldfacilitate the manufacturing function The manufacturing related operation include:

Material procurement,

Material handling,

Product conversion (e.g machining processes),

Changeovers and set-ups, and

Quality control procedures

All of these, if not handled properly, could lead to increased lead times A good product designtakes the facts or realities of these operations into consideration, incorporates them into the designand thereby facilitated these operations

WHAT IS DFM?

The idea behind a DFM effort is to modify the existing product’s (and/or its components’) design orhave a new product designed in such a way that the processes to manufacture the same are easier,quicker and or less expensive Reducing the manufacturing time is a major consideration This, ofcourse, has to be achieved without compromising on quality

DFM, as a concept, is not new although its huge importance has dawned on the manufacturersonly lately because of the intensity of competition in the present times It was Eli Whitney (and LeBlanc) in the Western part of the world, who developed system 200 years ago for manufacturingmuskets that incorporated the concept of interchangeable parts Earlier, all muskets were handmade.This was cumbersome in addition to being expensive It was also terribly time consuming and madethe immediate availability in large number a difficult task Whitney redesigned each part to a specificdimension with a limited tolerance This paved the way for mass manufacture of muskets Thus, hedesigned the musket (and its components) for large scale manufacturability

Henry Ford seemed to have grasped the concept of DFM about 90 years ago The followingstatement by him, about Model T succinctly expresses the idea behind DFM

“ It was up to me, the designer, to make the car so completely simple The less complex thearticle, the easier it is to make, the cheaper it may be sold We start with the consumer, work backthrough the design, and finally arrive at manufacturing.”*

Product design influences the efficiency of manufacturing Thereby it influences the flexibility

of marketing strategies and the organisation’s success in a competing business world

Cultural barrier: It is indeed surprising that despite the emphasis during the last several decades

on increasing efficiency in manufacturing, the importance of product design for manufacturingefficiency has not been appreciated A majority of the organisations have had the design departmentand the manufacturing department hardly ever interacting Product designers in some manufacturingindustries have been sitting in ivory towers They are highly respected, as their job is perceived to becreative like that of an accomplished artist, whereas, the manufacturing executive is seen as arough-and-tough person who has risen from the ranks, and therefore lacking in such finer abilities Acultural barrier seems to separate the designer of the product and the person manufacturing theproduct

‘Over the Wall’ syndrome: Product designer believe that their job is over once they release

their drawings They, so to say, throw their designs ‘over the wall’, for the manufacturing person to

do the next job of producing it Manufacturing engineers then struggle to produce the product that is

‘dumped into their laps’ At their best, design and development people have been more concernedwith how a particular feature requested by marketing may be translated into a physical parameter.How it may be produced, what it may cost and in what time, have not been much of their concern

As a result there are several engineering changes after the design has been released, because

the design gives multitudinous problems when taken up for manufacture The solution of theseproblems wastes precious time, and by the time the company has made the product it is too late asthe market has shifted It would have been so much better if the two departments—design andmanufacturing—had sat together during the early stages of product design and exchanged notes.With the heat of the global competition intensifying, companies have now started to seriouslythink as to how their products could remain competitive in a dynamic market The Japanese companiessuch as Toyota, Honda, Mitsubishi and several others have been the forerunners in manufacturingproducts that were of high quality, yet inexpensive and available at short notice They have done thisconsistently over the years, have been quite profitable all through and growing in the internationalmarkets, notably in the Western markets They achieved this despite the fact that it was the Westthat had been the harbinger of computer technology and automation, While it was Whitney andHenry Ford who had initiated the concept, their message was lost because of the preoccupationwith technological superiority The Japanese have much automation in their factories too; however,they seem to have grasped the value of simplicity in the plants—fewer parts, same or similar partsand parts that are simpler to manufacture Table 6.1 presents some DFM principles for assemblies

Table 6.1 DFM Principles for Assemblies

I Minimise the number of parts

(i) Reduce the absolute requirement of the variety of parts

Design the product in such a way that it consists of very few parts

Use a different technology, if necessary

(ii) Combine parts where feasible

Parts can be combined with other parts when:

They are of the same material

They do not move relative to other parts in the assembly

Their combination would not affect the assembly of other parts

After sales service does not require these to be separated

II Standardise designs

Standardise wherever possible:

Parts, modules, sub-assemblies, manufacturing processes and systems may bestandardised

Where the parts cannot be the same, see if they can be similar

Apply ‘group technology’ concept of ‘families’ of parts

Where possible use standard catalog components

III Minimise number of operations is the assembly

IV Modify the part/s with simplification of assembling in mind

Even minor modifications yield greater Assembly simplification

Slight changes in a part’s geometry can reduce the difficulty in grasping, positioning and inserting a part The effort and time taken can reduce significantly Human errors of putting a wrong part or of orienting it wrongly can be reduced.

Fig 6.14 Facilitation of insertion of parts by the use of funnel-shaped openings and tapered ends,

Source : Bralla, J.G., Design for Excellence, McGraw-Hill, New York, 1996.

V Use modules

This allows for more standardisation and speeds up the assembly process

VI Minimise ‘new’-ness

VII Use ‘Poka Yoke’ or fool-proofing

Design in such a way that the parts cannot be assembled incorrectly

6.6 DESIGN FOR EXCELLENCE

While designing for manufacturability, the product design team should keep in its consideration theentire product family Unitary approach may only result in sub-optimiation Moreover, by the samelogic, the designer/team should look beyond its own organisation to other associated organisations inthe value chain Design being a strategic activity, the design effort should not only improve thepresent efficiencies but should also keep the future in view while making the design and otherchanges Finally, customer service should be the motto that should drive the product design effort inany organisation Hence product design should be an all-round exercise, contributing to the overallexcellence of the organisation DFM is only about one aspect amongst many Truly, the effortsshould be towards design for excellence or DFX (X ≡Excellence)

A key part of any product realization process is the robustness of the design “Design for”initiatives such as Design for Assembly, Design for Cost, Design for Manufacturing, Design forTest, Design for Logistics, Design for Performance, and so on are now being referred to as Designfor Excellence (DFX) It was found that Japanese design emphasizes two key areas; the overalldevelopment process and concurrent engineering As shown in Figure 6.15 there is a strong customerfocus at the product-planning phase and in the product evaluation phase of the product developmentprocess The overall product development process is rooted in what Japanese firms call the “market-in” Market-in refers to having a clear set of customer-driven requirements as the basis for productdevelopment This is a fundamental requirement for DFX Concurrent engineering of product designand development activities provides the second main step in achieving DFX.

Fig 6.15 Japan’s product development activities (Toyoda Machine Tool Co.)

“In order to effectively deploy a timely design, thorough testing of the design and processtraining are considered a must A successful DFX process requires carefully managed design ofnew products As shown in Figure 6.16 there are numerous activities that must be coordinated inorder to develop and implement a successful product realization effort Information must be gatheredand analyzed from regions of the globe in which products will be introduced, and products must bemarket-tested in those specific regions An engine controller for use in an American version of aJapanese automobile, would, by necessity, receive its reliability testing in the United States

Products that are targeted globally also get tested in Japan in order to carefully control theproducts’ globalization Technology development activities must operate in parallel with producttechnology planning and market development planning to assure timely development and introduction

of new products

Fig 6.16 Concurrent development requirements (Sony Corp.)

6.6.1 Concurrent Development Activities

Focus on concurrent engineering is prevalent in all the organizations The primary objective is to getthe overall design right at the lowest cost This requires making critical decisions as to product

features/functions, manufacturability, and most importantly, cost.

Firms use a variety of concurrent engineering schematics to depict product, process, and equipmentdevelopment efforts For a firm with a core material competence, the product is often a new material,and its schematic would show concurrent development of materials, process, and equipment.Concurrent engineering is a culture in Japan New products and materials are developedsimultaneously with the processes and equipment needed to produce them

Japanese firms first attempted to break down functional barriers as part of the TQM (totalquality management) activities initiated to incorporate quality into product design activities This wasthe beginning of what is today referred to as concurrent engineering

MITI described the first functional integration model based on teams, as shown in Figure 6.17.This approach is a minimum requirement for competitive success in product development and forfacilitating rapid product introductions MITI points out that close coordination between functionsdramatically cuts time to market The problem with this model is that anyone of the functions canstill become a bottleneck to development activities because of shared resources

Fig 6.17 Functional Integration required for technological innovations (MITI)

Going beyond team developments, the concept of concurrent engineering is being practiced inJapan under TQM systems To shorten time to market for new technologies, firms are workingsimultaneously to develop component and insertion technologies to be introduced at the time theproduct is prototyped As shown in Figure 6.18 concurrent engineering requires parallel implementation

of all functional activities

Fig 6.18 Concurrent engineering for product innovation (MITI)

1. How does a good product design increase Organisational efficiencies?

2. Should the product design concern itself with Organisational efficiencies? Discuss

3. Why did, in your opinion, Henry fords message on product design get lost for so many decades?Discuss

4. ‘DFM is value engineering for manufacturing.’ Do you agree with this statement? Explain

5. Discuss the merits and demerits of using plastic parts in a product

6. Would DFM suppress creativity in a firm? Discuss

7. Several functions in the companies are getting to be strategic, product design being one of them Ifthat is the case, how should the organisation cope with this situation of multiple strategic functions?

8. “A Good Product Design Contributes To “TQM” in the Organisation.” Explain how this may happen

9. Wouldn’t reliability concerns clash with DFM concerns? Discuss

10. What is DFX? What all is included in DFX?

11. Time is money How can a product design project be hastened?

12. What are the problems, if any, with concurrent Engineering?

13. How will you incorporate environmental concerns into product design? Discuss

14. Can there be a design for disassembling? Where could this concept be useful? Give your tips for such

a design

REFERENCES

1 S.N Chary, Production and Operation Management, 3rd Edition, Tata McGraw-Hill

Publishing Company Limited, 2004

2 Eilon, Samuel, Elements of Production Planning and Control, Bombay Universal Book Co.

1985

3 Barry Shore, Operations Management, McGraw-Hill Publication, 1973.

7.1 INTRODUCTION AND MEANING

Materials management is a function, which aims for integrated approach towards the management

of materials in an industrial undertaking Its main objective is cost reduction and efficient handling ofmaterials at all stages and in all sections of the undertaking Its function includes several importantaspects connected with material, such as, purchasing, storage, inventory control, material handling,standardisation etc

7.2 SCOPE OR FUNCTIONS OF MATERIALS MANAGEMENT

Materials management is defined as “the function responsible for the coordination of planning, sourcing, purchasing, moving, storing and controlling materials in an optimum manner so as

to provide a pre-decided service to the customer at a minimum cost”.

From the definition it is clear that the scope of materials management is vast The functions ofmaterials management can be categorized in the following ways: (as shown in Fig 7.1.)

1 Material Planning and Control 2 Purchasing 3 Stores Management

4 Inventory Control or Management 5 Standardisation 6 Simplification

All the above mentioned functions of materials management has been discussed in detail in thischapter

MATERIALS MANAGEMENT

7

7.1 Introduction and Meaning

7.2 Scope or Functions of Materials

7.10 Ergonomics (Human Engineering)

7.11 Just-in-Time (JIT) Manufacturing

• Exercise

Fig 7.1 Scope of materials management

1 Materials planning and control: Based on the sales forecast and production plans, the

materials planning and control is done This involves estimating the individual requirements of parts,preparing materials budget, forecasting the levels of inventories, scheduling the orders and monitoringthe performance in relation to production and sales

2 Purchasing: This includes selection of sources of supply finalization in terms of purchase,

placement of purchase orders, follow-up, maintenance of smooth relations with suppliers, approval

of payments to suppliers, evaluating and rating suppliers

3 Stores management or management: This involves physical control of materials, preservation

of stores, minimization of obsolescence and damage through timely disposal and efficient handling,maintenance of stores records, proper location and stocking A store is also responsible for thephysical verification of stocks and reconciling them with book figures A store plays a vital role in theoperations of a company

4 Inventory control or management: Inventory generally refers to the materials in stock It

is also called the idle resource of an enterprise Inventories represent those items, which are eitherstocked for sale or they are in the process of manufacturing or they are in the form of materials,which are yet to be utilized The interval between receiving the purchased parts and transformingthem into final products varies from industries to industries depending upon the cycle time ofmanufacture It is, therefore, necessary to hold inventories of various kinds to act as a bufferbetween supply and demand for efficient operation of the system Thus, an effective control oninventory is a must for smooth and efficient running of the production cycle with least interruptions

5 Other related activities

(a) 3S

(i) Standardization: Standardization means producing maximum variety of products

from the minimum variety of materials, parts, tools and processes It is the process of establishingstandards or units of measure by which extent, quality, quantity, value, performance etc may becompared and measured

(ii) Simplification: The concept of simplification is closely related to standardization.

Simplification is the process of reducing the variety of products manufactured Simplification isconcerned with the reduction of product range, assemblies, parts, materials and design

(iii) Specifications: It refers to a precise statement that formulizes the requirements of

the customer It may relate to a product, process or a service

Example: Specifications of an axle block are Inside Dia = 2 ± 0.1 cm, Outside Dia = 4 ± 0.2

cm and Length = 10 ± 0.5 cm

(b) Value analysis: Value analysis is concerned with the costs added due to inefficient or

unnecessary specifications and features It makes its contribution in the last stage of product cycle,namely, the maturity stage At this stage research and development no longer make positivecontributions in terms of improving the efficiency of the functions of the product or adding newfunctions to it

(c) Ergonomics (Human Engineering): The human factors or human engineering is concerned

with man-machine system Ergonomics is “the design of human tasks, man-machine system, andeffective accomplishment of the job, including displays for presenting information to human sensors,controls for human operations and complex man-machine systems.” Each of the above functionsare dealt in detail

Material planning is a scientific technique of determining in advance the requirements of raw materials,ancillary parts and components, spares etc as directed by the production programme It is a sub-system in the overall planning activity There are many factors, which influence the activity ofmaterial planning These factors can be classified as macro and micro systems

1 Macro factors: Some of the micro factors which affect material planning, are price trends,

business cycles Govt import policy etc

2 Micro factors: Some of the micro factors that affect material planning are plant capacity utilization,

rejection rates, lead times, inventory levels, working capital, delegation of powers andcommunication

7.3.1 Techniques of Material Planning

One of the techniques of material planning is bill of material explosion Material planning through bill

of material explosion is shown below in Fig 7.2

Fig 7.2 Material planning

The basis for material planning is the forecast demand for the end products Forecasting techniquessuch as weighted average method, exponential smoothening and time series models are used for thesame Once the demand forecast is made, it is possible to go through the excerse of materialplanning Bill of materials is a document which shows list of materials required, unit consumptionlocation code for a given product An explosive chart is a series of bill of material grouped in amatrix form so that combined requirements for different components can be done requirements ofvarious materials are arrives at from the demand forecast, using bill of materials, through explosioncharts Thus material requirement plan will lead to be the development of delivery schedule of thematerials and purchasing of those material requirements.

Purchasing is an important function of materials management In any industry purchase meansbuying of equipments, materials, tools, parts etc required for industry The importance of the purchasefunction varies with nature and size of industry In small industry, this function is performed byworks manager and in large manufacturing concern; this function is done by a separate department.The moment a buyer places an order he commits a substantial portion of the finance of the corporationwhich affects the working capital and cash flow position He is a highly responsible person whomeets various salesmen and thus can be considered to have been contributing to the public relationsefforts of the company Thus, the buyer can make or mar the company’s image by his excellent orpoor relations with the vendors

7.4.1 Objectives of Purchasing

The basic objective of the purchasing function is to ensure continuity of supply of raw materials,sub-contracted items and spare parts and to reduce the ultimate cost of the finished goods In otherwords, the objective is not only to procure the raw materials at the lowest price but to reduce thecost of the final product

The objectives of the purchasing department can be outlined as under:

To avail the materials, suppliers and equipments at the minimum possible costs:

These are the inputs in the manufacturing operations The minimization of the input costincreases the productivity and resultantly the profitability of the operations

To ensure the continuous flow of production through continuous supply of raw materials,

components, tools etc with repair and maintenance service

To increase the asset turnover: The investment in the inventories should be kept minimum

in relation to the volume of sales This will increase the turnover of the assets and thus theprofitability of the company

To develop an alternative source of supply: Exploration of alternative sources of supply

of materials increases the bargaining ability of the buyer, minimisation of cost of materialsand increases the ability to meet the emergencies

To establish and maintain the good relations with the suppliers: Maintenance of good

relations with the supplier helps in evolving a favourable image in the business circles Suchrelations are beneficial to the buyer in terms of changing the reasonable price, preferentialallocation of material in case of material shortages, etc

To achieve maximum integration with other department of the company: The purchase

function is related with production department for specifications and flow of material,

engineering department for the purchase of tools, equipments and machines, marketing department for the forecasts of sales and its impact on procurement of materials, financial department for the purpose of maintaining levels of materials and estimating the working

capital required, personnel department for the purpose of manning and developing the

personnel of purchase department and maintaining good vendor relationship

To train and develop the personnel: Purchasing department is manned with varied types

of personnel The company should try to build the imaginative employee force through trainingand development

Efficient record keeping and management reporting: Paper processing is inherent in

the purchase function Such paper processing should be standardised so that record keepingcan be facilitated Periodic reporting to the management about the purchase activities justifiesthe independent existence of the department

7.4.2 Parameters of Purchasing

The success of any manufacturing activity is largely dependent on the procurement of raw materials

of right quality, in the right quantities, from right source, at the right time and at right price popularly

known as ten ‘R’s’ of the art of efficient purchasing They are described as the basic principles of

purchasing There are other well known parameters such as right contractual terms, right material,right place, right mode of transportation and right attitude are also considered for purchasing

1 Right price: It is the primary concern of any manufacturing organization to get an item at

the right price But right price need not be the lowest price It is very difficult to determine the rightprice; general guidance can be had from the cost structure of the product The ‘tender system’ ofbuying is normally used in public sector organizations but the objective should be to identify thelowest ‘responsible’ bidder and not the lowest bidder The technique of ‘learning curve’ also helpsthe purchase agent to determine the price of items with high labour content The price can be keptlow by proper planning and not by rush buying Price negotiation also helps to determine the rightprices

2 Right quality: Right quality implies that quality should be available, measurable and

understandable as far as practicable In order to determine the quality of a product sampling schemeswill be useful The right quality is determined by the cost of materials and the technical characteristics

as suited to the specific requirements The quality particulars are normally obtained from the indents.Since the objective of purchasing is to ensure continuity of supply to the user departments, the time

at which the material is provided to the user department assumes great importance

3 Right time: For determining the right time, the purchase manager should have lead time

information for all products and analyse its components for reducing the same Lead time is the totaltime elapsed between the recognition of the need of an item till the item arrives and is provided foruse This covers the entire duration of the materials cycle and consists of pre-contractual administrativelead time, manufacturing and transporting lead time and inspection lead time Since the inventoryincreases with higher lead time, it is desirable to analyse each component of the lead time so as toreduce the first and third components which are controllable While determining the purchases, the

buyer has to consider emergency situations like floods, strikes, etc He should have ‘contingencyplans’ when force major clauses become operative, for instance, the material is not available due tostrike, lock-out, floods, and earthquakes.

4 Right source: The source from which the material is procured should be dependable and

capable of supplying items of uniform quality The buyer has to decide which item should be directlyobtained from the manufacturer Source selection, source development and vendor rating play animportant role in buyer-seller relationships In emergencies, open market purchases and bazaarpurchases are restored to

5 Right quantity: The right quantity is the most important parameter in buying Concepts,

such as, economic order quantity, economic purchase quantity, fixed period and fixed quantity systems,will serve as broad guidelines But the buyer has to use his knowledge, experience and commonsense to determine the quantity after considering factors such as price structure, discounts, availability

of the item, favourable reciprocal relations, and make or buy consideration

Fig 7.3 Purchase parameters

6 Right attitude: Developing the right attitude too, is necessary as one often comes across

such statement: ‘Purchasing knows the price of everything and value of nothing’; ‘We buy price andnot cost’; ‘When will our order placers become purchase managers?’; ‘Purchasing acts like a postbox’ Therefore, purchasing should keep ‘progress’ as its key activity and should be future-oriented

The purchase manager should be innovative and his long-term objective should be to minimise thecost of the ultimate product He will be able to achieve this if he aims himself with techniques, such

as, value analysis, materials intelligence, purchases research, SWOT analysis, purchase budget leadtime analysis, etc

7 Right contracts: The buyer has to adopt separate policies and procedures for capital and

consumer items He should be able to distinguish between indigenous and international purchasingprocedures He should be aware of the legal and contractual aspects in international practices

8 Right material: Right type of material required for the production is an important parameter

in purchasing Techniques, such as, value analysis will enable the buyer to locate the right material

9 Right transportation: Right mode of transportation have to be identified as this forms a

critical segment in the cost profile of an item It is an established fact that the cost of the shipping ofore, gravel, sand, etc., is normally more than the cost of the item itself

10 Right place of delivery: Specifying the right place of delivery, like head office or works,

would often minimize the handling and transportation cost

7.4.3 Purchasing Procedure

The procedure describes the sequence of steps leading to the completion of an identified specifictask The purchasing procedure comprises the following steps as indicated in Fig 4.4

1 Recognition of the need: The initiation of procedure starts with the recognition of the need

by the needy section The demand is lodged with the purchase department in the prescribed PurchaseRequisition Form forwarded by the authorised person either directly or through the Stores Department.The purchase requisition clearly specifies the details, such as, specification of materials, quality andquantity, suggested supplier, etc Generally, the low value sundries and items of common use arepurchased for stock while costlier and special items are purchased according the production programmes.Generally, the corporate level executives are authorized signatories to such demands Such purchasesare approved by the Board of Directors The reference of the approval is made on requisition and acopy of the requisition is sent to the secretary for the purpose of overall planning and budgeting

2 The Selection of the supplier: The process of selection of supplier involves two basic

aspects: searching for all possible sources and short listing out of the identified sources The completeinformation about the supplier is available from various sources, such as, trade directories,advertisement in trade journals, direct mailing by the suppliers, interview with suppliers, salesmen,suggestions from business associates, visit to trade fair, participation in industries convention, etc.Identification of more and more sources helps in selecting better and economical supplier It should

be noted that the low bidder is not always the best bidder When everything except price is equal, thelow bidder will be selected The important considerations in the selection are the price, ability tosupply the required quantity, maintenance of quality standards, financial standing etc It should benoted that it is not necessary to go for this process for all types of purchases For the repetitiveorders and for the purchases of low-value, small lot items, generally the previous suppliers with goodrecords are preferred

3 Placing the order: Once the supplier is selected the next step is to place the purchase

order Purchase order is a letter sent to the supplier asking to supply the said material At least sixcopies of purchase order are prepared by the purchase section and each copy is separately signed

by the purchase officer Out these copies, one copy each is sent to store-keeper, supplier, accountssection, inspection department and to the department placing the requisition and one copy is retained

by the purchase department for record

Fig 7.4 Purchasing procedure

4 Follow-up of the order: Follow-up procedure should be employed wherever the costs and

risks resulting from the delayed deliveries of materials are greater than the cost of follow-up procedure,the follow-up procedure tries to see that the purchase order is confirmed by the supplier and thedelivery is promised It is also necessary to review the outstanding orders at regular intervals and tocommunicate with the supplier in case of need Generally, a routine urge is made to the supplier bysending a printed post card or a circular letter asking him to confirm that the delivery is on the way

or will be made as per agreement In absence of any reply or unsatisfactory reply, the supplier may

be contact through personal letter, phone, telegram and/or even personal visit

5 Receiving and inspection of the materials: The receiving department receives the materials

supplied by the vendor The quantity are verified and tallied with the purchase order The receipt ofthe materials is recorded on the specially designed receiving slips or forms which also specify thename of the vendor and the purchase order number It also records any discrepancy, damagedcondition of the consignment or inferiority of the materials The purchase department is informedimmediately about the receipt of the materials Usually a copy of the receiving slip is sent to thepurchase department